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Problems With Using a Business Broker

Problems With Using Brokers

While there are strong advantages to using brokers (outlined above), there are a number of problems that you should be aware of before you retain a broker to sell your firm:

Broker Incompetence

The unfortunate fact is that many business brokers are not very good! The business brokering industry is largely unregulated. In most states, anyone can declare himself a business broker and go to work with no training, tests, or mandated experience. In all states (as of this writing) any real estate broker can work as a business broker. While some real estate brokers are fine business brokers, real estate brokering is a very different field; the qualifications to be effective in each field are not the same. Typically, when the real estate market gets soft, many real estate brokers become instant business brokers.

There is no shortage of horror stories of business brokers who did more harm than good in selling a business. Don't let your situation become one of the stories.

Brokers Are Looking For "The Big Sales"

Business brokers work on a commission basis. From the broker's perspective it makes sense to try to sell those businesses that will yield the largest commissions. This is even truer when you consider that many brokers feel (with some justification) that it is no harder to sell a $500,000 business than it is to sell a $50,000 business.

The fact is that brokers are less interested in smaller businesses. Drawing the line between small and not so small varies from broker to broker, but a business for sale for under $100,000 generally will not attract much attention from an experienced broker.

This means that about 75% of the businesses in this country are too small to attract a broker's interest. Brokers are spending a lot of time trying to get listings from 25% of the nation's businesses while neglecting the 75% of businesses which are in the under $100,000 category.

Even when a broker does list a very small business, it is not realistic to expect that broker to devote too much time and energy to that listing. He or she will probably put the smaller firm on the back burner as soon as a more sizable deal requires attention.

Minimum Commissions

When a broker does list a smaller firm for sale, he or she will usually demand a minimum commission. Currently minimum commissions range from $4,000 to over $10,000. This means that if your business sells for $50,000 and the broker gets a $10,000 commission, 20% of the sale price goes to the broker.

The minimum commission will not necessarily provide extra motivation for a broker; bigger deals pay higher commissions and may be no harder to close.

Tying Up Your Business

Brokers usually insist on an exclusive agreement for a period of time ranging from three months to two years. This means that a broker can list your firm for sale, do little to sell it, but still collect the full commission if you sell it yourself. In fact, if you list the business for sale with another broker while it is still listed with the first broker, you may end up owing two brokers a commission. While some courts have been known to invalidate sole and exclusive listing agreements if a seller can prove the broker has not made a reasonable attempt to sell the property, this is not a situation you would want to get into.

Compromising For Commission

Brokers will argue that because their commission goes up with the purchase price, they will work to get you the best price possible. There is another perspective. A broker ends up with nothing if there is no sale. While a broker would certainly prefer a higher commission, he or she would prefer some commission to no commission. Further, it is often preferable to take say an $80,000 commission now than a possible $110,000 commission later. A broker then may advise or even pressure you to take an offer just so he or she can get a quick commission and move on.

You can try to better align your interests with that of the broker by asking for a commission structure that aligns the broker's interest with yours. For example, let's say you expect the business to sell for between $1,000,000 and $1,100,000. The broker asks for a 10% commission. In this scenario if the broker sells your business for the top of the range, he'll get a $110,000 commission and the bottom of the range nets him $10,000 less. Now if instead you said, "It would be easy to sell the business for $900,000, even without a broker, so I'll 5% if the price is less than $900,000, 7% if the price is below $1,000,000, and 7% of the first million and 30% of any amount over $1,000,000." The broker would earn:

$45,000 on a $900,000 sale (5%),
$70,000 on a $1,000,000 sale (7%)
$100,000 on a $1,100,000 sale (9%)
and $130,000 on a $1,200,000 sale (10.8%)

With this structure the broker has a strong incentive to work hard get the best possible price for the business. Of course, the broker is taking a chance that the business will not do as well as anticipated and the seller is taking a chance that the broker will get an above average commission because the business performed better than expected during the sales process.

Another alternative to hiring a broker on commission is to sell your business yourself. Much of the information that you will need is presented here. You can hire us, or another broker, to do some of the tasks that you are less comfortable with or to do tasks that are hard to do on your own while preserving confidentiality. We have packages with affordable prices or we can consult on an hourly basis.